Unit 3: Budgetary control
Cost and Management Accounting notes · PTU syllabus (BBA 303-18)
On this page
Unit summary
A budget is a plan expressed in numbers. Budgetary control compares actual results with the budget to keep the organisation on track. This unit covers the concept, objectives, merits and limitations of budgeting, budget administration, functional budgets, fixed and flexible budgets, and zero-base budgeting.
After this unit you can
- Explain budgeting and budgetary control, their objectives, merits and limitations
- Describe budget administration
- Prepare functional budgets including the cash budget
- Prepare a flexible budget and explain zero-base budgeting
PTU syllabus topics
- Concept of budgeting and budgetary control
- objectives
- merits and limitations
- budget administration
- functional budgets
- fixed and flexible budgets
- zero base budgeting
Activity level
One level only
Several levels
Changes
Not adjusted to actual output
Adjusts to actual output
Control use
Limited
Effective for comparing costs
Suits
Stable conditions
Changing demand
Topic 1
Budget and budgetary control
A budget is a quantitative statement, prepared in advance, of the policy to be followed during a period to achieve given objectives. Budgetary control establishes budgets, compares actual results with them, and takes corrective action. Objectives: planning, coordination, control, communication and motivation. Limitations: based on estimates, can be rigid, time-consuming, and may cause conflict if imposed without participation.
Topic 2
Budget administration
- 1
Budget committee
Senior managers coordinate the process
- 2
Budget officer
Coordinates and compiles budgets
- 3
Budget manual
Procedures, responsibilities, timetable
- 4
Budget period
Usually one year, split into months
- 5
Key (limiting) factor
Usually sales — prepared first
- 6
Prepare, approve and review budgets
Topic 3
Functional budgets
| Budget | Shows |
|---|---|
| Sales budget | Expected sales quantity and value |
| Production budget | Units to produce = sales + closing stock − opening stock |
| Materials budget | Materials needed and purchases |
| Labour budget | Labour hours and cost |
| Overhead budgets | Factory, administration, selling overheads |
| Cash budget | Expected cash receipts and payments and the cash balance |
| Master budget | A summary of all functional budgets with budgeted P&L and balance sheet |
Example
Sales budget 5,000 units; opening stock 800; desired closing stock 1,000. Production = 5,000 + 1,000 − 800 = 5,200 units.
Topic 4
Fixed, flexible and zero-base budgets
Activity level
One
Several levels
Adjusts to actual output?
No
Yes
Control value
Limited if output changes
Meaningful comparisons
Suits
Stable conditions
Fluctuating demand
A flexible budget separates costs into fixed, variable and semi-variable, then shows costs at different activity levels (e.g. 60%, 80%, 100% capacity). Zero-base budgeting (ZBB) starts every budget from zero; each activity must be justified as if new, rather than adding a percentage to last year. Developed by Peter Pyhrr at Texas Instruments. Participative budgeting involves the managers who must achieve the budget; performance budgeting links expenditure to programmes and results.
Key terms
- Budget
- A plan in quantitative terms for a future period
- Budgetary control
- Comparing actual results with budgets and correcting deviations
- Master budget
- The summary of all functional budgets
- Flexible budget
- A budget adjusted for different activity levels
- Zero-base budgeting
- Justifying every activity from zero each period
Quick revision
- Sales budget is usually prepared first (key factor).
- Production = sales + closing stock − opening stock.
- Cash budget shows receipts, payments and balance.
- Flexible budget: fixed + variable + semi-variable costs at several levels.
- ZBB: start from zero.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define budgetary control.
- Q2.What is a key factor?
- Q3.What is a cash budget?
- Q4.Differentiate between fixed and flexible budgets.
- Q5.What is zero-base budgeting?
Long-answer questions
- Q1.Explain the objectives, merits and limitations of budgetary control.
- Q2.Prepare a cash budget for three months from given data.
- Q3.Prepare a flexible budget at 60%, 80% and 100% capacity.
- Q4.Explain zero-base budgeting and its advantages.
Stuck on this unit?
Message SBS on WhatsApp for help with Cost and Management Accounting, or to ask about studying BBA at Synetic.